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Gold Futures Pull Back

Simon Constable

Gold prices took a dip Monday as the greenback rallied in anticipation of bullish comments by Federal Reserve Chairman Ben Bernanke later this week.

April-dated contracts eased $5 to close at $667.30 an ounce on the Comex division of the New York Mercantile Exchange. The PowerShares DB Gold(DGL) exchange-traded fund, which tracks futures prices, was slipping 0.6%.

The bullion ETFs that hold inventories of gold, iShares Comex Gold Trust (IAU) and streetTracks Gold Shares (GLD), were down 0.8% and 0.7%, respectively.

"The market is expecting a more hawkish tone from Federal Reserve Chairman Ben Bernanke, opening the door to monetary tightening," says Alan Gayle, senior investment strategist at Trusco Capital Management, in Richmond, Va.

On Wednesday, Bernanke will begin two days of testimony to the Senate Banking Committee detailing the state of the economy and plans for future changes in monetary policy.

Gayle notes that late last year, a disconnect existed between the bond market, which saw future weakness in the U.S. economy, and the Fed, which seemed to see strength ahead. During January, fixed-income investors fell more in line with the stated view of Fed board members.

A robust economy would likely steer policymakers toward hiking interest rates, which would in turn help support the greenback. Foreign-exchange investors often choose currencies on the basis of yield on short-term government debt.

The value of the U.S. currency and that of gold tend to move in opposite directions over time. One dollar was recently buying 121.768 yen, up from 121.68 yen late Friday. Euros were being exchanged for $1.2962, down from $1.3006 previously.

Turning to the retail sector, the U.S. Mint says it sold 39,500 ounces of its 22-karat (91.7% pure) gold eagle coins to dealers in January. In the same period, only 14,000 of the Mint's 24-karat (99.99% pure) one-ounce buffalos were purchased.

That's a contrast with the whole of 2006, when the buffalo, which only went on sale at the end of June, outsold the eagle by more than 20% (323,000 buffalos vs. 261,000 ounces of eagles).

Among the miners, at least one observer sees the possibility of a major rise for the Amex Gold Bugs Index. Clive Maund, a Chile-based technical analyst, says the index is currently in a major uptrend, according his analysis.

"If this trend channel is operative," writes Maund in a research report, "then we are close to an optimum buying area with the index still being relatively close to the lower boundary of the uptrend channel."

He sees long-term channel support at around 300 and short-term resistance around 375. The index was recently lower by 1.5% at around 335, dragged down in part by a 3.1% loss in shares of component stock Kinross Gold(KGC).

As for base metals, March-dated Comex copper contracts were down 4 cents at $2.48 a pound, although further weakness may be mitigated by hedge fund activity.

"Large speculator net short positions in copper were steady last week at [around] $1.4 [billion]," writes Mary Ann Bartels, a technical research analyst at Merrill Lynch in New York. "This level of shorting may provide a floor on the metal despite its recent technical weakness."

The presence of large-scale short sellers is considered bullish because at some point positions will need to be covered, thus providing buying pressure.

Shares of copper miner Phelps Dodge(PD) were recently up a hair.

In aluminum, India's Hindalco has said it will purchase Novelis(NVL), sending the shares up 13.5% in recent action.